Commercial Construction Contracts: Everything You Need to Know

Commercial construction contracts are legal agreements that are binding for both the builder and the owner. They state that the finished job will receive a certain amount of compensation and how that compensation gets distributed.3 min read

Commercial construction contracts are legal agreements that are binding for both the builder and the owner. They state that the finished job will receive a certain amount of compensation and how that compensation gets distributed.

Types of Construction Contracts: Lump Sum or Fixed Price Contract

This contract has a total fixed price for all activities related to construction. Lump sum contracts can include benefits or incentives for termination that happens early. There may also be penalties, or liquidated damages, for late termination.

These contracts are preferred when there's a defined schedule and clear scope that's been reviewed and agreed on. The contract is used when a risk needs to be switched over to the builder and the owner doesn't want change orders for work that's unspecified.

The contractor needs to also include a percentage cost related to carrying the risk. These will be hidden in the price that's fixed. It's more difficult to get credit back for work that wasn't completed on a lump sum contract, so that's important to consider when looking at different options.

Cost Plus Contracts

This kind of contract involves payment for the purchases, actual costs, and other expenses that are generated from the construction activity directly. They must have certain information about an amount that's pre-negotiated that covers the contract's profit and overhead. The cost should be detailed and classified as indirect or direct costs.

There are different variations of cost plus contracts. The most commonly used ones include the following:

Cost plus fixed fee.

Cost plus with bonus contract and guaranteed maximum price.

Cost plus fixed percentage.

Cost plus with guaranteed maximum price contract.

These contracts are used when the scope isn't clearly specified and the owner is in charge of establishing limits on how much the contract bills. This type of contract is harder to track and a higher level of supervision is needed.

Time and Material Contracts When Scope Is Not Clear

Time and material contracts are preferred if the scope of the project hasn't been defined clearly or at all. The contractor and the owner need to agree on an hourly or daily rate, as well as extra expenses that could come up in the construction process. The costs should be classified as indirect, direct, overhead, and markup in the contract.

The owner may want to establish a specific project length or cap that must be met by the contractor so they can decrease their risk. This type of contract is helpful for small scopes or when a realistic guess can be made on how long the project will take to be completed.

Unit Pricing Contracts

Another common type of contract is a unit pricing contract. This is used in federal agencies and by builders. Unit prices are set during a bidding process as the owner sets certain quantities and pricing for a specific amount of unitized items. The owner can quickly verify if they're being charged with uninflated prices by providing unit prices. A unit price can be adjusted during scope changes, which makes it easier for the builder and owner to agree during change orders.

What Is a Construction Bidding?

Construction bidding is where a general contractor is chosen to work on a construction project. Sometimes, the only thing that matters in the bidding process is showing the lowest price to the owner. Other times, the qualifications of the contractor are just as important, if not more, as having the lower dollar amount.

Using Construction Bid Estimation Software

Construction bid software is used by contractors to estimate costs and as part of the budget process when coming up with a bid for a new project. This was introduced several decades ago and has made a large impact in only a short amount of time. This used to be a major issue of concern for construction projects, but it can now be done efficiently and quickly.

The main advantage of estimating software is how it automates job costing. The software comes with a database of construction costs that get updated monthly by subscription. Most builders prefer to have their own database for job costing so it's more accurate.

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